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Updated 31 January, 2014

If current trends continue, then in 25 years, India will be champing at the heels of China. The world will be led by a G2, with a possible G3 in the wings.

China is variously predicted to overtake the US in nominal GDP terms in the next 15 to 20 years. And many predict that India will overtake firstly, the US, in another 15 to 20 years; and secondly, China in a further 15 to 20 years. In other words they predict that China’s economic leadership will last no more than three to four decades and by the end of the 21st century the ranking will be India, China, and America. It should be noted that up to 1978 India’s GDP was ahead of China’s and, according to the IMF, India’s growth in 2010 was slightly higher than China’s! However, it has dropped since, to brelow 5% in 2013 and forecast to be around 6% in 2014 (China’s was 7.7% and forecast to be around 7.5%)

Analysts who predict that India will beat China sooner rather than later base their views on the following:

The rule of law: India is more transparent and conforms to a recognisable western model; China is largely opaque and follows its own model

Language: more Indians are English (the global language of commerce, science & technology, aviation, etc) fluent than Chinese

Capitalism: Indian versus Chinese.

We discuss each of these factors.

We also discuss factors that mitigate against India overtaking China any time soon. A simple indicator is that of the World Economic Forumcompetitiveness indicator. China improved from 34 in rank in 2007 to 27 in 2011, while India dropped from 48 to 51. These include:

Infrastructure: India lags behind and will take decades to catch up

Economic disparity: whereas Chinese economic growth seems to have percolated down to the masses, India’s record so far is that the poor have not benefited as much. This disparity is in terms of both urban versus rural and upper versus lower castes, not to mention the purported illegal classification of out-caste.

Literacy and skills: China decided decades ago that everyone, farmers included need to be educated. As a result, literacy and numeracy is practically universal at 93%. By contrast India’s workforce is estimated to be only 66% literate.

Political tensions : although both countries have serious political tensions, India has lurking across the ‘red corridor’ an insurgency that may erupt into a major revolution, the likes of which one can only imagine as that of the Russian or Chinese revolution.

Corruption: while both China and India suffer from corruption – both are in the mid ranges by country according to Transparency International – the difference is that China tries to do something about it, whereas India seems to be more complacent.

Peasants and women: whereas China, since Liberation in 1949 has steadily removed barriers for equality between the rural and urban populations and between women and men, this is far from so in India.

Factors favouring India

Demographics

India, like many developing nations, has more young people than old with 65% under 35 years of age (median age 25) and that ratio is increasing. In times past this would have been a disadvantage. But with enough food and jobs (at least for now), this is an advantage. In contrast, having adopted a one-child policy for decades which is slowly being eased, China, like Japan and the developed nations, the population is ageing – median age 34. The expression “getting old before getting rich” is truly applicable to China, for despite its nominal GDP being second only to the US, the per capita GDP is amongst those of poor developing nations. India is at the same level at present. But with accelerated growth and assuming its belated investment in infrastructure takes, it will, in due course, speed ahead of China.

Note, however, that population is a two-edged sword. If handled properly, it is an advantage. But if food and or water supply falls short and a poor infrastructure prevents surplus areas supplying those in deficit, could soon become a major disadvantage.

Of all the factors favouring India over China in the medium term, demographics is the least debatable.

Democracy is inefficient. A bumpier but freer road. If India was to undertake a dam akin to the Three Gorges, it would still be in the planning stage, if not still in the public consultation stage. However, let’s not forget that after the Second World War, Germany and Japan made huge leaps forward, despite being democracies. On the other hand, if someone like Mao were to take over the Chinese leadership again, with support of the Red Army, who can or will stop him? It is no good saying “that is most unlikely.”

Thanks to democracy, West Bengal overturned its Communist Party majority in May 2011 after three decades. The winner is Mamata Banerjee, a woman politician. At the same time, the Communists also lost Kerala. In Tamil Nadu, another woman, a former movie star, Jayalalitha (who goes by a single name) won.

With true democracy comes the voice of the people. In India, despite holding to obsolete caste and other repressive practices, there are regular protests and demonstrations against such practices, often triggered by some particularly offensive incident, such as the organised rape of a woman because her brother happened to try and elope with a woman of a higher caste. And sometimes these achieve the results intended.

Chinese people also protest and demonstrate. But more often than not, despite travelling all the way to Beijing to petition as they did in Imperial times, their pleas fall on deaf ears, such as the claims of shoddy construction caused by corruption which led to many school buildings collapsing in the Szechuan earthquake in 2008. These petitions subsequently led to the arrest of world famous artist Ai WeiWei in 2011 who joined the cause. Unlike in India, Mr Ai has not been put on trial. He follows many other dissidents arrested and incarcerated without trial. Finally, following international protests, Ai was released in June 2011 only to face a tax evasion law suit – which he claims is not true.

It should be noted, however, that in many rural areas of India, the voters are not necessarily voting as they choose, but are ‘guided’ by local leaders and, in some cases, by local landlords and others to whom the farmers are indebted to. Sometimes, whole villages or districts vote unanimously – a rare occurrence if they were voting voluntarily.

Patrick French, in researching for his book ‘India: A Portrait‘, found that every Indian MP under 30 has in effect ‘inherited’ a seat from a family member. Not quite as non-representative as the composition of the Chinese people’s national assembly, but …

Language

Although the Chinese are catching up, India counts English as one of its national languages. A natural consequence of this is that middle and upper class families tend to send their children to schools where the medium of instruction is English. In some cases these kids know and speak English better than their mother tongue, especially if the family’s native tongue is different from that of the city/state they live in which covers all of south India and the east such as Assam and Bengal. Learning a language as one subject amongst many is altogether different from learning all subjects (apart from languages) in English.

As English is the international language for trade and commerce and of many industry sectors such as IT, air transport, pharmaceuticals, diplomacy, and of course multi-national firms, knowing English intuitively is a tremendous advantage compared to knowing it as a learned school subject. They say, your real mother tongue is the one you dream in, and for many educated Indians that is exactly so. However, since 2001, English has become compulsory in Chinese schools from the age of around 9. this means that by now (2011), all school leavers will be able to at least read English, even if they cannot quite speak it fluently. So, by 2036, the language advantage will have been eroded.

However, in many countries, partly encouraged by the formation of Confucius Institutes, more and more children are being enrolled in Chinese language lessons. Within a couple of generations, speaking English may be far less an advantage than speaking Mandarin!

Capitalism

Indian capitalism consists both of the internationally recognised form such as practised by Tata and other global firms that happen to count either India as its home country of Indians as its owners/leaders; and of the local ‘mama-papa’ indigenous variety’ and many more in between. At the grass-roots level, there is probably not much difference between Indian and Chinese capitalism. But once one looks at the larger firms, we immediately see that nearly all Indian firms are privately owned and directed – for example, IndiGo, a young low-cost airline in June 2011 placed the largest single Airbus order for 180 aircraft at $15.6 billion; whereas a majority of larger Chinese firms are either state owned or at least state directed. There is no material difference as long as the state direction is commercially sensible. But if the state decides to direct a firm in a political and non-commercially sensible manner then the results may be detrimental to the customers or staff of the firm.

A particular characteristic of India’s capitalism is that many of the large firms are essentially family businesses. They work well in normal circumstances, but sometimes things can go wrong. This happened when Dhirubhai Ambani, founder of Reliance Industries, died and resulted in a long-winded feud between his two sons, Mukesh and Anil, which led to the eventual breakup of Reliance Industries into two independent companies with similar names.

In September 2011, India announced it is setting up a Sovereign Wealth Fund to help finance global acquisition projects in particular of natural resources.

Of the factors favouring India over China, this is the least likely to be a major advantage to India.

Factors not favouring India

Infrastructure

India’s infrastructure is woefully inadequate. McKinsey estimates that India will need 300GW by 2017 which means that the current pace of installing new power stations need to be increased by between 5 and 10 times! Around 40% of freight is carried by rail in India, despite its legendary railway system. In China and the US rail freight accounts for 50%.

Although economically India is more than a developing nation, its infrastructure is not much ahead of developing nations in Africa. Many African states, with Chinese support either or both in terms of finance and engineering are beginning to look more able to support rapid growth than India. The Economic Intelligence Unit (part of the Economist) recently ranked India 75th out of 82 countries in terms of infrastructure.

For example, Bangalore barely manages to survive its daily traffic jams. It’s a good thing that most of the call centre customers are in very different time zones. Gurgaon, a new city 25 km south of New Delhi has grown from practically nothing to the Indian base of many ‘household’ global firms in 20 years with 1.5 million population. There are 200,000 migrant workers, many as household servants. One estimate is that 500,000 people in Gurgaon are involved in outsourcing. On the surface it is very modern with 26 shopping malls, seven golf courses, luxury shops, modern office blocks and apartment buildings. But there is no city wide sewer or drainage system, reliable electricity or water, parking, decent roads or citywide public transport. Garbage collection is an erstwhile service.

In June 2011, an estimated 18 million tonnes of grain lie exposed to the elements because the government has failed to invest in storage capacity. Storage capacity runs at 50 million tonnes to cover emergencies, another 15 million tonnes is planned but will not be ready for two years.

Tesco, a UK-based retailer is about to expand in India. Kishore Biyani, head of India’s biggest retailer, Future Group, warned that Tesco had better invest in bullock carts to supply its planned out-of-town superstores as roads are not good enough for the envisaged volume. This harks back to when Duke of Wellington, then Brigadier Arthur Wellesley, hired huge herds of bullocks to provide an extensive supply chain when he defeated Tipoo Sultan. It seems that Indian transport has not changed much in 200 plus years!

China’s growth is supported by good infrastructure. India’s is despite poor infrastructure. So how does it work? Through private enterprise compensating for poor public service. Offices and apartments have diesel generators and in-house water tanks. Corporations provide private buses or taxis for staff, esp for women working very early or late. Private security outnumbers official police, in Gurgaon by four to one.

India had planned to spend $500bn on infrastructure in the current five-year plan to 2012. Nuclear plants will account for $100bn over 10 years. 80 GWatts (the equivalent of 80 nuclear plants) are under construction – of which 6 are nuclear (compared to 26 being constructed in China). But a recent estimate is that only half will be spent. It is planning to spend $1 trillion to 2017. No one is optimistic that such a sum will actually be spent. Despite producing some 170,000 new engineers pa, many dream of working in IT rather than civil or mechanical engineering. The EIU predicts that by 2014, India’s infrastructure will rank 73rd.

India is trying its best to catch up with China in many areas. For example, it formed Indian Ports Global to develop overseas ports along the model of Dubai’s DP World. This organisation will initially be under India’s Shipping Ministry, which is also at the same time developing Indian ports as 90% of Indian import/export is carried by sea. This is both a strategic move as well as a reaction to China building ports in Sri Lanka (Hambantota), Pakistan (Gwadar), Burma (KyaukPhyu) and Bangladesh (Sonadia) – countries India considers within its zone of influence. Shipping Corporation of India is, simultaneously, planning to purchase 100 new ships in the next 10 years.

There is good news too. The ‘golden quadrilateral’ highway linking Delhi, Bombay, Chennai (Madras) and Calcutta was been completed in October 2010 and is attracting increasing traffic. The Delhi Metro surpassed 2m passengers recently and phase III will extend the lines to 380km and 4m passengers by 2016. It was built on time and to budget. There are 126 domestic airports and internal passenger air traffic grows relentlessly: nearly 25% in 2011 compared to 2010.

Of the factors is India’s disfavour, infrastructure is the most critical.

Economic disparity

India has a developed middle class that is growing from an estimated 50 million today to 580 million in 15 years. But the poor, both rural and urban, are not being pulled up as rapidly as in China. Extreme poverty – defined as earning less than $1 per day – is much higher in India than China and dropping slower. Some 400m Indians are still deemed extremely poor. Part of the reason is the caste system, and the second, in villages, is that the landlord / feudal structure has not been eradicated in India as it had been in the early years of the revolution in China. Many farmers are beholden to their landlords, much as it has been for centuries. Even migrating to the city for jobs often depends on loans from the landlord to cover costs. The other effect of the old landlord system is that most of agriculture is in small holdings not prone to major mechanisation and productivity gains.

Every year that passes sees more of the Dalits and people from ‘tribal’ areas move up through reserved education and public sector jobs. One day, caste will no longer be an issue. But not yet. Of the unfavourable factors, caste is probably the least problematic.

Despite the statistics about Indian graduates in science and engineering, there is a shortage of skilled labour. The quality is also variable. The best universities including the famous Indian Institutes of Technology are world class, but many others produce graduates good at passing exams but not at real-life jobs. The outsourcing firms tend to run full-time courses for many of their fresh intake to bring them up to adequate levels before assigning them to business activities.

Political tensions

Earlier we mentioned the Red Corridor, a swathe of states from North East to South West which is dominated by insurgents and militants. Around 200 of the 588 districts are affected. In some states, whole districts are ‘no go’ areas for the police. Only the army or paramilitary police hold any sway at all.

Corruption

Both China and India are perceived to be corrupt. Transparency International places both at around the midpoint amongst nations. The big difference is that China tries to curb it. Hundreds of officials are executed each year. An official report by People’s Bank of China (leaked by accident) tells of 10,000 corrupt officials escaping abroad with £80 billion of ill-gotten gains. President Hu, in his address at the 90th Anniversary of the Chinese Communist Party, saw fit to speak out against corruption. In India, it is more muted, although Pratyush Sinha, retired head of India’s corruption watchdog said in September 2010 that 30% of his compatriots are “utterly corrupt”. And an initiative to pass an anti-corruption law in 2011 was passed by the Lok Sabha (the lower house) but blocked by the Rajya Sabha (the upper house), though activists are hopeful the debate will be restarted early in 2012.

The knock-on effect of corruption is that it is most common in transactions involving land, public contracts and natural resources. Two ministers are charged with bribery in awarding 2G telecoms licences that may have cost India up to £25bn in lost licence fees. The very stuff that concerns infrastructure, the most serious stumbling block to India’s progress.

Matters are changing though. There is a proposal by Kausik Basu, advisor to PM Manmohan Singh that will stop the payer from being sued and go only for the receiver. This way, there will be some encouragement for those not wanting to pay bribes to blow the whistle. In August 2011, India seemed to be awakening to the detrimental effects of corruption by rallying to the support of Anna Hazare who is on hunger strike, demanding an independent Ombudsman who will be the last call for not only civil servants but also ministers. This has not only aroused the politically alert middle class but even the famous tiffin carries, the 5,000 strong dubbawallahs of Bombay, who deliver 100,000s of office workers with hot lunches prepared by wives or mothers have gone on strike in support; their first in 120 years. The government has finally recognising that Shri Hazare’s cause is unstoppable and were in negotiations to agree action.

Peasants and women

In China, there is no visible bar to women taking senior roles in government or industry. Admittedly, the top central committee of nine in central government are all men. But in industry, women are as likely to be bosses or owners as men. And there are no structural or institutionalised bars to peasants moving into cities to work or to open businesses in villages and rural areas.

The story in India is very different. There is still the perception that a woman moves from her father’s house into her husband’s house. Yes, there are a lot of women in IT in Bangalore and Gurgaon. But they are the exceptions rather than the rule.

Also, despite not having a one-child policy, there is an estimated imbalance of c1 million girls a year due to female infanticide mainly through illegal abortions. Peasants and the Dalits, as well as tribal people (reflected in the Naxalite insurgency), still find it hard to break into the upward mobile careers, despite 60 years of affirmative action. Believe it or not, it was only in 2009 that an act was passed to provide universal, free and compulsory education for all children aged between six and 14. No wonder illiteracy is around 33% (China’s is 9%), with only 50% for women. China passed the equivalent of this law 60 years or three generations ago.

The net effect is that India is running with 1/4 of its full human capital. A great self-inflicted drawback. After infrastructure, this is the second most critical negative factor.